The Geopolitics of Russian Natural Gas Harvard University’s Belfer Center and
Rice University’s Baker Institute Center for Energy Studies
February 2014
JAMES A.BAKER IIIINSTITUTE FOR PUBLIC POLICY
RICE UNIVERSITY
T HE G EOPOLITICS OF R USSIAN N ATURAL G AS
BY
TATIANA MITROVA,PH.D.
HEAD OF THE OIL AND GAS DEPARTMENT
ENERGY RESEARCH INSTITUTE
RUSSIAN ACADEMY OF SCIENCES
FEBRUARY 21,2014
THESE PAPERS WERE WRITTEN BY A RESEARCHER (OR RESEARCHERS) WHO PARTICIPATED IN A
BAKER INSTITUTE RESEARCH PROJECT.WHEREVER FEASIBLE, THESE PAPERS ARE REVIEWED BY OUTSIDE EXPERTS BEFORE THEY ARE RELEASED. HOWEVER, THE RESEARCH AND VIEWS EXPRESSED IN THESE PAPERS ARE THOSE OF THE INDIVIDUAL RESEARCHER(S), AND DO NOT NECESSARILY REPRESENT THE VIEWS OF THE JAMES A.BAKER IIIINSTITUTE FOR PUBLIC POLICY.
©2014 BY THE JAMES A.BAKER IIIINSTITUTE FOR PUBLIC POLICY OF RICE UNIVERSITY
THIS MATERIAL MAY BE QUOTED OR REPRODUCED WITHOUT PRIOR PERMISSION,
PROVIDED APPROPRIATE CREDIT IS GIVEN TO THE AUTHOR AND THE JAMES A.BAKER IIIINSTITUTE FOR PUBLIC POLICY.
Acknowledgments
The Center for Energy Studies of Rice University’s Baker Institute would like to thank ConocoPhillips and the sponsors of the Baker Institute Center for Energy Studies for their generous support of this program. The Center for Energy Studies further acknowledges the contributions by study researchers and writers.
Energy Forum Members Advisory Board
Accenture
The Honorable & Mrs. Hushang Ansary Baker Botts L.L.P.
Baker Hughes Incorporated BP
California Energy Commission Cheniere Energy, Inc.
Chevron Corporation ConocoPhillips Deloitte
EDP Renewables North America, LLC Energy Future Holdings Corporation ExxonMobil Corporation
The Institute of Energy Economics, Japan (IEEJ) Marathon Oil Corporation
Saudi Aramco Schlumberger Shell Oil Company
Shell Exploration & Production Co.
Trinity Industries, Inc.
Wallace S. Wilson
Associate Members Direct Energy
Hess Corporation
Tudor, Pickering, Holt & Co. LLC Members
Afren Resources USA
Air Products and Chemicals, Inc.
American Air Liquide Holdings, Inc.
Apache Corporation
Aramco Services Company IPR - GDF SUEZ North America Pioneer Natural Resources USA Inc.
Rockwater Energy Solutions, Inc.
TOTAL E&P New Ventures, Inc.
TOTAL E&P USA, Inc.
VAALCO Energy
Supporting Members Deloitte MarketPoint LLC Energy Intelligence
Acknowledgments
The Geopolitics of Energy Project at Harvard University’s Kennedy School is grateful for the support it receives from BP, as well as the Belfer Center for Science and International Affairs. It also appreciates the work and contributions provided by the scholars who have participated in this program.
About the Study
Some of the most dramatic energy developments of recent years have been in the realm of natural gas. Huge quantities of unconventional U.S. shale gas are now commercially viable, changing the strategic picture for the United States by making it self-sufficient in natural gas for the foreseeable future. This development alone has reverberated throughout the globe, causing shifts in patterns of trade and leading other countries in Europe and Asia to explore their own shale gas potential. Such developments are putting pressure on longstanding arrangements, such as oil-linked gas contracts and the separate nature of North American, European, and Asian gas markets, and may lead to strategic shifts, such as the weakening of Russia’s dominance in the European gas market.
Against this backdrop, the Center for Energy Studies of Rice University’s Baker Institute and the Belfer Center for Science and International Affairs of Harvard University’s Kennedy School launched a two-year study on the geopolitical implications of natural gas. The project brought together experts from academia and industry to explore the potential for new quantities of conventional and unconventional natural gas reaching global markets in the years ahead. The effort drew on more than 15 country experts of producer and consumer countries who assessed the prospects for gas consumption and production in the country in question, based on anticipated political, economic, and policy trends. Building on these case studies, the project formulated different scenarios and used the Rice World Gas Trade Model to assess the cumulative impact of country-specific changes on the global gas market and geopolitics more broadly.
Study Authors
Rawi Abdelal Luay Al Khatteeb Govinda Avasarala Beibei Bao
Soner Cagaptay Charles Ebinger Jareer Elass Andreas Goldthau Peter Hartley
Simon Henderson Trevor Houser Amy Myers Jaffe Robert Johnston Ken Koyama Azzedine Layachi Michael Levi Steven Lewis Suzanne Maloney
David Mares
Kenneth B. Medlock Keily Miller
Tatiana Mitrova Isidro Morales Martha Brill Olcott Meghan O’Sullivan Ronald Ripple
Introduction
Russia is one of the world’s leading producers of primary energy resources, and is especially well known for its strong position in the global gas markets. It holds the world’s largest gas reserves and is currently the world’s second gas producer after the United States, which recently outstripped Russia because of the shale revolution.
Nevertheless, Russia still preserves its status as the largest gas exporter in the world, leaving Qatar and Norway far behind (see Figure 1), and most likely will keep this position in the future (although Australia and the US are expected to become top exporters by the end of this decade).
Figure 1. Main Net Exporters of Gas (Pipeline and LNG) in 2012
Source: BP Statistical Review of World Energy 2013
Russia has a unique transcontinental infrastructure in the heart of Eurasia (150,000 km of trunk pipelines), which also makes it a backbone of the evolving, huge Eurasian gas market (which could include Europe, North Africa, the Commonwealth of Independent States (CIS), Caspian
Sea region, and Northeast Asia). Control over the transportation assets in this region together with vast gas reserves make Russia the key element of this new market.
Most of Russia’s gas exports are directed to Europe and CIS, and in the future, a significant increase in Asian exports is expected. Russia’s total of 170–200 bcm of gas exports make it significant from a natural gas perspective, as currently it alone provides for about 20% of the international gas trade. As a dominant supplier of both the European and the CIS gas markets (nearly 50% and 100% of total gas imports, respectively), Russia has a huge influence on the prices and on the “rules of the game” in these regions, as well as a certain geopolitical leverage.
Protecting oil indexation and long-term take-or-pay contracts, Russia remains a citadel of the traditional gas market model. Subsequently, it is one of the main ideologists of the Gas Exporting Countries Forum, promoting a “security of supply” approach to energy security with strong guarantees to producers.
In the context of this study, another unique feature is that Russia has used gas as an important geopolitical tool for many years. Gas is one of the key (and contradictory) elements of EU- Russian economic and political interplay. In the FSU and former Eastern Block area, gas is perhaps the main instrument of integration, allowing Russia to exercise its influence over these countries. Plans to expand LNG and pipeline exports to Asia reflect the Russian desire to extend relations and maybe even build strategic alliances with Asian countries (mainly China) in opposition to the US and Europe.
This geopolitical use of gas by the Russian government is often regarded as a geopolitical
“weapon.” However, a more appropriate term would be “an instrument to obtain influence”—for the former empire, it is very important to possess such an instrument for international negotiations and to strengthen its soft power.
Russian Energy Policy Background
Russian Primary Energy Balance
Russia is the world’s third-largest producer and consumer of energy after China and the US. It produces 10% and consumes 5% of the planet’s energy resources. Russia’s energy sector, with its output of about 1300 thousand tons of oil equivalent (mtoe) (42% of which is provided by gas), allows the country to export 600 mtoe—12% of the world’s energy trade. This makes Russia a global leader in energy exports and, at the same time, one of the largest energy consumers in the world with a huge domestic market (see Figures 2 and 3, and Table 1).
Figure 2. Russian Primary Energy Production, 2000–2011
Source: IEA statistics, September 2013
Figure 3. Russian Primary Energy Consumption, 2000–2011
Source: IEA statistics, September 2013
Table 1. Russia’s Exports of Energy Resources, 2005–2013
2005 2006 2007 2008 2009 2010 2011 2012
Oil, million tons 252.5 248.4 258.6 243.1 247.5 250.7 244.5 240.0 Oil products, million tons 97.1 103.5 112.3 118.1 124.5 133.2 132.1 138.2 Natural gas (pipeline), bcm 209.2 202.8 191.9 195.4 168.4 177.8 189.7 178.7
LNG, bcm 0.0 0.0 0.0 0.0 5.1 14.6 13.9 13.1
Hard coal, million tons 79.7 91.4 98.0 97.4 105.1 115.7 110.5 130.4
Electric power, TWh 17.9 18.6 15.8 18.6 15.0 19.1 18.7 13.1
Note: Figures include oil and gas exported to member states of the Customs Union.
Sources: Bank of Russia, “Customs statistics of foreign trade of the Russian Federation” 2005-2013, data from OJSC Gazprom’s website
The energy sector is traditionally a crucial part of the Russian economy, providing for the bulk of its export revenues, budget incomes, and GDP. During the last two decades, the Russian economy became increasingly dependent on commodities exports (hydrocarbons in particular), despite numerous statements about the need to reduce dependence and the setting of targets. In 2011, oil, its products, and natural gas accounted for more than 67% of export yields, and customs duties and Mineral Extraction Tax (MET) on oil and gas provided more than half of federal revenues (Figure 4).
Figure 4. The Role of the Energy Sector in Russian GDP, Export, and Budget Revenues in 2011
Source: Energy Ministry, based on Rosstat data
Figure 4 illustrates quite well the significance of oil and gas sector revenues for the entire Russian economy. Oil and gas investments have a huge multiplicative effect, as they create an additional domestic demand for other industries’ products and ensure the infrastructure development required for economic growth. Proceeds from hydrocarbon exports have an impact on the financial resources of manufacturers and service providers and, therefore, on business activity in the country and its economic development prospects.
These revenues play an even more crucial role in meeting budget expenditures, such as allocations for military and social purposes, and hence maintaining the country’s social stability and integrity. The government is now trying to implement the president’s electoral assurances, which requires greater budget expenditures, and its main hopes are focused on the oil and gas sector. Thus all events in this key economic sector are directly significant for national security — the government places special emphasis on the oil and gas industry, and the country’s top authorities desire to exert maximum control over it.
Given the importance of the Russian energy sector to the economy, most key decisions about energy policy and regulation are made at the highest levels of the government. This is particularly true for the oil and gas sector: oil and gas revenues are a colossal resource for the government. Key decisions in the energy sector are usually made by President Putin. Below this level, multiple ministries and other executive offices work on the development of energy sector policy proposals and different aspects of policymaking (Figure 5).
Figure 5. State Institutions in the Energy Sector
Presidential Commission on the strategy of the fuel and energy complex development and environmental security
Russian government
Deputy Prime Minister The Government Commission on the Energy Sector, Resupply of Energy Resources, and
Economic Efficiency Coordination of the work of federal authorities
carrying out the state policy for the energy sector and
manufacturing Orchestration of the efforts of federal and regional
authorities and other organizations towards a stable and favorable environment for the energy industry, assure energy conservation, efficiency and sensitivity to consumer demand
Ministry of Economic Development Development of state policy in energy efficiency for national or municipal needs, improvement of the economy’s energy efficiency, licensing, accreditation of certifying bodies, and testing laboratories under requirements for nuclear and radiation safety
Federal Statistics Service (Rosstat)
Ministry of Energy Russian Energy Agency (REA)
Development and execution of the state policy and legislative regulation for the energy industries—
electric power, oil production, oil processing, gas, coal, shale and peat complexes, oversight of main pipelines for gas, oil and their products, renewable energy, shared production of hydrocarbons, oil chemistry, state services, and management of state properties in the energy sector
Central Control Administration of the Energy Sector
Federal Antimonopoly Service (FAS) Federal Customs Service (FCS)
Analytic Center (AC) Federal Tariff Service (FTS)
Ministry of Natural Resources and the Environment
Federal Service for Environmental, Technological, and Nuclear Supervision
(Rostekhnadzor) Development and execution of the state policy and
legislative regulation for study, use, reproduction and protection of natural resources, land, environmental monitoring and pollution control, including radiation, industrial and consumer waste, state environmental monitoring, management of natural preserves, and state environmental evaluations.
Federal Service for the Supervision of Natural Resources
Federal Subsoil Resources Management Agency (Rosnedra)
Source: Websites of the Russian government, Ministries, and Federal services
The state is not only developing “the rules of the game,” but also interfering into the everyday operational functioning of the energy industry. The state-controlled Rosneft produces nearly 50%
of the country’s oil, and state-controlled Gazprom produces more than 75% of gas. The role of the private sector in the energy business is also substantial, though not as powerful as the state`s.
During the transitional period in 1990s, the energy sector was cross-subsidizing the rest of the economy, and due to the accumulated underinvestment it currently faces serious challenges:
• Outdated technical facilities and equipment (almost 60% in the electric power and gas industries, 80% in the oil processing), technological and environmental backwardness, extremely high energy intensity accompanied by insufficient investments in renovation and development of the energy industry
• Depletion of the Soviet legacy fields and an increasing share of the “heavy to produce”
hydrocarbon reserves (tight and ultraviscous oil, wet and low-pressure gas), and reserves located in remote regions of the Eastern Siberia and the Far East, Yamal peninsula, Artic continental shelf, and Caspian Sea
• Lack of competition, high concentration, and increasing state involvement in the operational management of the energy sector
• Strong fuel price disproportions, leading to the industry’s and the economy’s overdependence on natural gas, which accounts for about 53% of the domestic primary energy consumption
“Energy Strategy of the Russian Federation up to 2030”1 is the basic document that sets out Russian energy policy. Officially, Russia’s energy policy aims “to make the most effective use of its natural energy reserves and the energy sector’s potential to secure steady economic growth, better living standards, and stronger positions on the global market.” According to this document, the most important strategic initiatives of the state in the energy industry are:
• Creation of oil and gas industrial complexes in the east of the country (which should allow the regions to not only become independent from outside energy and hasten their development, but also diversify exports flows to Asian Pacific countries)
• Exploration of the Arctic continental shelf and northern regions (which should help stabilize oil and gas production after a possible downturn in the traditional oil-producing areas of Western Siberia in 2015–2030)
• Development of the difficult and hard-to-access fields (primarily through different tax breaks)
• Development and territorial diversification of the energy infrastructure
• Renewable energy promotion
• Energy saving
As the state’s involvement in the energy sector in Russia is huge, and many features of the planned economy are still in place, this strategy is supplemented and—in some cases—modified by so-called General Schemes (Master Plans) for the oil, gas, coal, and power sectors. There are also several specific conceptions and programs, such as the Eastern Gas Program or the state program “Energy Efficiency and Development of the Energy Industry,” which introduces a number of energy-saving reforms, to be implemented in 2013–2020.
Other strategic documents correspond to the energy strategy; their priorities are efficiency, security, and reliability. For example, Russia’s pledge to the Copenhagen Accord is a 15–25%
reduction in emissions by 2020 compared to a 1990 baseline (but so far it does not demand any additional efforts from the Russian side, as the level of Soviet energy consumption is still not achieved. Another target adopted by the Russian authorities for 2020 is to increase the share of
renewables in the electricity mix to 4.5%. Many of the environmental policies come from the Climate Doctrine Action Plan adopted by the government of Russia in April 2011. This plan sets out a range of measures for different sectors of the Russian economy, including economic instruments for limiting greenhouse gas emissions in industry and power generation. Another aim, a 40% reduction in Russia’s energy intensity by 2020 compared to 2007, is much more ambitious. This target was announced by then-President Dmitry Medvedev in 2008, and its achievement would have substantial implications for energy use.
In conclusion, the government in Russia is heavily involved in the energy sector through policies that promote nuclear, renewables, and coal; limit gas demand growth; and help to diversify the fuel mix, and also through direct interventions in the functioning of the energy sector.
The Role of Gas in Russian Energy Policy
Gas plays the key role in Russian energy sector development. After huge gas discoveries in the Western Siberia in the 1970s and the government’s decision to introduce a “gas pause” (in order to have time for the development of clean coal technology), gas gradually became a dominant fuel, and by 1991 it provided for 43% of total primary energy consumption in Russia. During the transitional period in the 1990s oil and coal prices were liberalized, while price regulation remained in the gas industry in order to protect the competitiveness of the national industry and avoid social tensions. As a result, gas became the cheapest fuel and its consumption increased at the highest rates. By 2012, its share in the primary energy consumption reached 53% (49% in electricity generation). This is one of the highest figures globally. Furthermore, the share of gas consumption as boiler and furnace fuel exceeds 95% in some regions, and at the same time this gas is supplied for 2,000–3,000 km from Western Siberia to the European part of Russia through only three trunk pipelines. This overdependence is regarded by the Russian government as a threat to national energy security. But fuel competition is not easy to promote: the problem is that the main coal producing assets are located in Eastern Siberia, and transporting coal by railroads pushes up the delivered cost substantially, making coal unattractive in the power sectors.
There are, however, more fundamental reasons why gas—despite its notably smaller contribution to the national budget2—is so important for Russia’s economy: its role as a domestic political tool and as an instrument of foreign policy. While the oil sector is the revenue provider for the Russian budget, the gas sector has a much broader political agenda, including social issues (keeping energy costs as a share of household budgets low by cross-subsidization at the expense of industrial consumers, and providing improved living standards in remote areas by means of regional gasification), influence over the regions (including subsidization of individual depressed regions), low energy prices for domestic industries, increasing role in the Russian fiscal system, and providing financing for “projects of state importance” (like facilities construction for the Sochi Winter Olympics, the Asia-Pacific Economic Cooperation Summit in Vladivostok, etc.), as well as a source of revenue for vested interest groups and the political elite.
Gas also plays a key role in establishing Russia’s credibility in the global energy economy and is an important tool in a number of significant foreign policy initiatives. It is one of the main instruments of Russia’s integration into global trade, and especially of Russia’s economic relationship with the EU. The development of various joint ventures and direct investments, as well as major foreign projects, helps integrate Russian business into global economic relations, gradually making Russia a full-fledged participant in the global economic system. In fact, gas is one sector of the global economy in which Russia possesses vast expertise and competitive advantage. These economic considerations and the available assets shape geopolitical consequences in many ways. Gas supplies, or implementation of gas projects, serve as a tool to preserve Russia’s geopolitical impact in certain regions (e.g., the CIS, Eastern Europe, and the Balkans). In the post-Soviet area, gas is perhaps the main instrument of integration, allowing Russia to exercise its influence over CIS countries and promote regional integration organizations like Custom Union and EvrazEs (albeit by means of cost-ineffective solutions, such as expensive gas imports from Central Asia and Azerbaijan or gas supplies to Belarus at reduced prices). Gas was, and still is, the most important element in negotiations not only with Ukraine and Belarus, but with practically all countries bordering Russia. At the same time, due to the extremely high share of hydrocarbon exports in budget revenues, Russia itself is highly
2 Oil accounts for the largest share of budget revenues—36% in 2012—because of high export duties and a high tax on production. The share of gas in budget revenues is far less important—only 5%—because both export duties and
dependent on the external market conditions (first of all, on the prices and import volumes in Europe, Russia’s primary market).
It is important for the Russian government to possess such an instrument for international negotiations and the strengthening of its authority. As a result, the decision-making process in the Russian gas industry is strongly influenced by the state. Key decisions are usually made directly by President Putin, who regards this sphere as strategically critical and follows its operation in detail. He is personally sustaining the balance of power between the main competing groups the in gas market (Gazprom, Rosneft, and Novatek), and he makes long-term commitments on upstream and infrastructure development, involvement of foreign partners, and—in many cases—the contract negotiations process.
Resources (financial and otherwise) to develop gas fields or build infrastructure for transportation are allocated by the companies, but under strict governmental control—especially regarding Gazprom, whose annual investment program has to be approved by governmental representatives.
Due to the scale of the new projects, the gas industry requires significant external finance for its resource development. So far, it has not had problems attracting international financing, as gas producing companies have demonstrated their high financial performance during the last decade and are regarded by the international banks as prime-quality borrowers. However, due to the country risks, they must pay higher credit interest than Western companies.
At the beginning of this decade, Russia’s gas industry found itself in an unexpectedly difficult situation. Virtually all of its external and internal conditions had radically changed for the worse, and its former problems grown more acute and urgently needed to be addressed. The coming decade will be critical for the industry’s development, and its prospects will largely depend on the government’s pricing and institutional policies. Since gas accounts for the major share of the country’s primary energy consumption and power generation, the cost of a mistake is extremely high in Russia, forcing the government to be very cautious in decision-making (and inevitably
increasing the uncertainties associated with the future development of the Russian gas market).
The main problems currently facing the gas industry in Russia are the following:
• Depletion of gas fields in the traditional Nadym-Pur-Taz area of the Tyumen region and the need for developing new centers of gas production in the Yamal Peninsula, the Arctic continental shelf, East Siberia, and the Far East (most of the latter fields are characterized by high production and transportation costs)
• Changes in the gas industry’s resource base with an increasing proportion of difficult to recover (low-pressure gas) and multicomponent reserves—wet gases characterized by complex composition with a high content of ethane, propane, butane, other hydrocarbons, as well as hydrogen sulfide and helium, which makes it necessary to develop gas processing and gas-chemical industry
• Technological backwardness in all stages (production, transportation, and processing)
• Imperfection of existing taxation and pricing systems, insufficient liberalization of the domestic market, and insufficient development of exchange trade mechanisms and pricing
• Transit risks associated with gas exports to Europe
• Decline in Russian gas sales on the European market due to poor demand (dampened by the crisis and slowly recovering), toughening inter-fuel competition with coal and renewables, stronger competition with the other suppliers of pipeline gas, and, especially, LNG
• Slow progress with the Chinese gas market (unfinished talks on the price issue and the choice between the eastern and western routes, and uncertainty regarding the time frame for relevant projects) as well as with the whole Asia-Pacific market, including slow development of LNG exports in this direction, fraught with losing a promising market niche
• High costs of most of the export projects that put Russia in a vulnerable position with toughening competition in the export markets
• Shrinkage of the promising niche for the Russian gas exports due to the increase in global energy efficiency and the development of renewable energy sources and unconventional gas resources
In order to deal with these challenges, the main strategic priorities of the state in the gas sphere, set out in the official documents, are the following:
• To reduce overdependence on gas and to diversify the fuel mix and thus “promote rational energy balance” (which includes reducing the share of gas in the structure of domestic energy consumption and increasing the share of non-fuel energy in the structure of the fuel and energy balance3). The target set in the 2009 Energy Strategy is to reduce the share of gas in the fuel mix from 54% to 46–47% in 2030.
• To promote energy efficiency and gas saving in order to limit gas demand growth.
• To efficiently develop the existing fields and begin developing new fields in order to compensate for declining production.
• To modernize and expand the gas transportation network, connecting new fields with the Unified Gas Supply System (UGSS), and to increase the system flexibility by UGSS capacity expansion (target is a 25% increase in capacity—from the current 69 bcm to 87 bcm by 2020).
• To fulfill export obligations, maintaining the position of Russian gas in Europe, while diversifying energy supplies and reducing dependence on European customers.
• To increase export volumes and revenues through diversification of export markets, primarily to the Asian market. The target is to increase the Asian markets’ share to 26–
27% of total energy exports (and up to 20% of gas exports) by 2030.
• To diversify the structure of exports with a growing share of LNG, which is set to reach 15% of gas exports by 2030. The idea is to increase Russia’s share in the global LNG market from 4.8% to 10% by 2020 and to 20% afterwards.
Achieving these targets would be very difficult, as external conditions (including the US shale boom) are becoming more and more unfavorable for the Russian gas industry.
3 “Energy Strategy of Russia for the Period Up to 2030,” Ministry of Energy of the Russian Federation, 2010, p. 158.
Russian Natural Gas Resources and Reserves
Probable gas resources of the Russian Federation are estimated at 164.2 tcm, including 63.8 tcm of the resources at the continental shelf. According to the Ministry of Natural Resources, as of January 1, 2012, the country’s extractable conventional gas resources amounted to 48.8 tcm of ABC1 gas and 19.6 tcm of C2 gas (Russian reserve classification), including those of the continental shelf that amount to 8 tcm. The significant part of these reserves is concentrated in the Nadym-Pur-Taz region in the Yamalo-Nenets Autonomous District, the center of Russia’s gas production. The explored resources there represent 40% of the country’s total, and most of them are in large and shallow deposits, which are convenient to tap (Cenomanian gas). This makes production much easier. The rest of the Yamalo-Nenets Autonomous District is also rich in natural gas, containing two-thirds of Russia’s known resources of free gas.
The country’s gas resources are characterized by an abundance of large fields. The state balance of January 1, 2011, listed 841 free gas deposits, with the 28 largest fields containing 70% of all Russian gas. The 77 second-largest ones, with supplies between 75 to 500 bcm, account for more than 20%. The distributed reserves of natural gas in the beginning of 2011 included 619 fields—
25 of the largest and most of the second-largest ones. The undistributed resources are small or difficult to access.4 The most important natural gas fields in Russia are shown in Appendix 1:
Most Important Natural Gas Fields in Russia.
In general, the structure of the Russian gas reserves is favorable, but challenges to development are determined by the reduction of highly productive and shallow reserves under commercial development, severe weather conditions, and the remoteness of new gas production regions from consumption centers. There is a need to develop large reserves of low-pressure gas; the percentage of rich condensate and helium gas in the proved reserves becomes higher. This necessitates the building of gas processing plants to develop these fields cost-effectively.
4 Ministry of Natural Resources and Environment, “On the condition and use of raw mineral resources of the
The gas reserves of the fields under development, such as the Medvezhye and Yamburgskoye fields in the Tyumen Region (the main national gas producing region), have been depleted by 76–79% and reached a decline stage. The unique Urengoy field has been depleted by 54%.
In principle, Russia’s gas industry has sufficient resource base for a much higher rate of production. However, this will require development of higher costs resources.
Russia also has unconventional gas resources—coal-bed methane (CBM), mainly located in coal mines in Eastern Siberia, and shale gas (Russia is in the very early stages of studying its shale gas potential). Russia is estimated to possess immense CBM resources of approximately 84 tcm, commensurate with one-third of the country’s natural gas resources. With methane resources estimated to exceed 13 tcm, Kuznetsky in Eastern Siberia is currently the most suitable basin for commercial gas production (Figure 6). In February 2010 Gazprom inaugurated the first Russian facility for CBM production from the Taldinskoye field in the Kemerovo Oblast and produced 4.9 mln. cm of CBM in a pilot operation mode. Meanwhile, Gazprom arranged the trial use of CBM for power generation and as a motor fuel. Pilot commercial operation of the Taldinskoye field is to follow. According to early estimates, the Kuzbass basin may yield an annual 20 bcm of gas in the long term.
Figure 6. CBM Resources Development in Russia
Source: Gazprom
The preliminary estimation data on shale gas in Russia are drastically different: 20–200 tcm. The most complete document related to hydrocarbon mining from unconventional sources in Russia is “National Program for Mineral Resources Base Preparation and Hydrocarbon Production from Unconventional Sources,” developed by the All-Russia Research Geological Oil Institute (VNIGRI) in 2011. Pursuant to the program, the potential shale gas resources in Russia are estimated at 48.8 tcm. Most resources are concentrated in Western and Eastern Siberia (Figure 7). If the actual drilling is initiated, reserve estimates will most likely be revised upwards, but so far there are no stakeholders interested in this business development in Russia. There is also no serious discussion in Russia concerning the future of shale gas in the country: most experts and
Gazprom and Russian Energy Ministry representatives agree that shale gas production in Russia is not economically feasible in the near future as compared to various conventional gas projects.
Figure 7. Shale Gas in Main Shale Formations in Russia
Source: All Russia Petroleum Research Exploration Institute (VNIGRI)
Natural Gas Demand and Supply Dynamics in Russia
Production and imports, which form the supply side of the Russian gas balance, have been increasing steadily from the early 2000s up until the crisis in 2009. The demand side demonstrated similar dynamics, with growing domestic consumption in all sectors of the economy and growing exports to Western Europe, the CIS, and the Asia-Pacific (Figure 8).
Figure 8. Natural Gas Supply/Demand Balance in Russia, 2000–2012 (bcm)
Sources: Federal State Statistics Service, Energy Research Institute of the Russian Academy of Sciences (ERI RAS)
The global economic crisis and the radical changes in the European gas market negatively affected the Russian gas industry. In 2009, gas exports in Russia fell by 16% and domestic gas consumption declined by 5%. Reacting to the adverse market situation, gas production went down 12% and gas imports were reduced by 33%. As a result, over the last five years, Russia’s gas sector has undergone huge transformations in the upstream, midstream, and downstream segments.
Pre-crisis levels have not yet been achieved in the gas industry’s main parameters, except for domestic consumption. The Russian gas industry remains in the state of stagnation, which is fraught with very serious consequences for the further development of the domestic gas market and gas price dynamics.
Gas Production Trends in Russia
In 2013, Russian gas production was 668 bcm (up 2% since 2012), with Gazprom providing 487 bcm of production. The basis of the Russian gas industry is formed by the Soviet legacy giant fields in Western Siberia (Figure 9) in the Nadym-Pur-Taz region (Yambugskoe, Urengoyskoe,
and Medvezhie), which have been in a declining phase for quite a long time. Gazprom’s giant Zapolyarnoye field, which has been producing since 2001, reached a plateau level of 130 bcm of gas per year in 2012,5 higher than initially planned. These huge fields assure low average prices of gas production in Russia—according to Gazprom, in 2009 they were about $17/mcm; by 2012, they increased to $31/mcm because of the higher Mineral Extraction Tax (MET), but are still very low compared to the next generation of fields.
In order to replace these depleted fields, the Yamal’s largest field, Bovanenkovskoe (with estimated gas reserves of 4.9 tcm), was commissioned in 2012 in line with investment decisions made before the crisis.6 In the long term, this additional gas can help offset the expected decline in legacy fields (which are believed to be approximately 60% depleted on average as for the Cenomanian layers) and offer a source of production growth, should consumption pick up in the coming years.
Additional sources of gas production growth are located in the Far East, where gas production currently reaches about 30 bcm, mostly from Sakhalin feeding the LNG plant.
5 Discovered in 1965. The overall reserves of the Zapolyarnoye gas field account for 3.3 tcm, of which 2.6 tcm lie in the Cenomanian layers and 735 bcm in the Valanginian layers.
6 Production may reach up to 90 bcm in 2015 and 115 bcm in 2017, when 775 wells were initially planned to be operational, and 140 bcm at a later stage. These targets may be revised somewhat to match the development of demand in Russia and abroad.
Figure 9. Western Siberia and Yamal Peninsular Field Map
Source: Sberbank Investment Research
The commissioning of Bovanenkovo, the start of development of the deep-lying Neocomian and Valanzhin deposits at the Zapolyarnoye field and Achimov deposits at the Yamburg field (both fields are operated by Gazprom), and rapid production growth by the non-Gazprom gas producers (also called independent gas producers or IGPs) created a perceivable oversupply of gas on the domestic market.
Beginning in 2008, Russian gas producing companies have been forced to hold back production due to poor domestic and foreign demand. Since Gazprom was forced to assume the role of the main “shock absorber,” it has been losing its positions on the market to independent gas producers (Novatek and vertically integrated oil companies, primarily Rosneft) with every
passing year. From 2005 onward, the proportion of non-Gazprom gas producers in the total gas production has increased from 15% to 25% (Figure 10).
Figure 10. Changes in the Structure of Gas Production in Russia (bcm)
Sources: Federal State Statistics Service, ERI RAS
Simultaneously, non-Gazprom gas producers have increased gas supplies to the domestic market from 63.3 bcm in 2009 to 95.7 bcm in 2012. There has been a drastic increase in the amount of contracts awarded to IGPs by major gas consumers, including in the power industry. Thanks to their strong lobbying positions, IGPs have managed to secure unprecedented tax breaks and government support, which Gazprom often failed to obtain. Moreover, with the implementation of a stricter regulation and high fines for gas flaring, associated petroleum gas from oil companies is becoming a more important contributor—its share is 8.4% of the total, and is on the rise, from 43 bcm in 2005 to 55 bcm in 2012.
It must be noted that the growth of production by non-Gazprom gas producers does not mean the formation of a competitive market. In 2012, Novatek accounted for about 42% of the total commercial gas output of IGPs and approximately 60% of the gas supplied by non-Gazprom gas producers via the UGSS. Novatek is supplying gas to 35 regions of Russia. As of late 2011,
Novatek accounted for 100% of gas supplies to the Russia’s largest industrial area, the Chelyabinsk region, including to the region’s population and utility services.
Rosneft has also been aggressively expanding its gas business through mergers and acquisitions, and managed to increase its gas production from 8 bcm in 2006 to 21 bcm (Figure 11). Through the acquisition of ITERA, Rosneft has secured the position of 100% gas supplier for the Sverdlovsk region. Therefore, the market structure evolving currently in Russia is an oligopolistic system with a number of regional monopolies, while the traditional relations between Gazprom and its consumers are changing under the pressure of IGPs. Moreover, the growing proportion of non-Gazprom producers is beginning to influence prices on the market.
Unlike in the past, when IGPs were generally charging higher than Gazprom (because they provided “above-the-limit” gas), in the past several years IGPs have increasingly often charged less than Gazprom and offered a 3–10% discount from the prices set by the Federal Tariff Service (FTS).
Figure 11. Structure of Gas Production by Non-Gazprom Gas Producers (bcm)
Sources: ERI RAS, Central Control Administration of the Fuel and Energy Complex
Non-Gazprom gas producers tend to develop into an increasingly powerful domestic institutional environment. Here it is appropriate to recall the decisions made in 2011–2012 to increase the Mineral Extraction Tax (MET) for Gazprom while reducing it for non-Gazprom gas producers.
The new MET calculation procedure introduced in 2013, “taking into account geological and geographical specificities and market situation,” also favored the IGPs. Zero MET was established for natural gas injected back into formation in order to maintain formation pressure and for gas produced offshore and at the Yamal Peninsula. The law “On Amending the Federal Law ‘On Gas Exports’” adopted in late 2013 well deserves to be called a historic act as it liberalized LNG exports. The question of liberalizing pipeline gas exports is now being raised increasingly often.
Major Producers of Natural Gas
Gazprom is the largest state-controlled7 producer and supplier of natural gas (487 bcm in 2012).
Gazprom’s monopoly is based on its status (established under the law “On Gas Supplies” of 1999) of a company responsible for supplying natural gas to consumers in Russia and fulfilling the country’s international obligations in natural gas supplies. Derived from this status is Gazprom’s right of forming long-term, yearly, and current gas balances. This status is supported by the Gazprom’s ownership of the UGSS in the European part of Russia and its licenses to develop the country’s largest gas fields. Furthermore, over the past 10 years, Gazprom consolidated most of the gas distribution companies into its group and thus controls the major part of gas supplies via the low- and medium-pressure networks, which also strengthens its monopoly position. Under the law adopted in 2006, the UGSS owner enjoys the exclusive right to export natural gas via pipelines and in liquefied form (export monopoly). In 2013, the LNG export monopoly was abolished, but the pipeline gas exports monopoly still remains.
In total, Gazprom operates 127 fields and 7,226 existing gas production wells.8 But 12 giant and super-giant fields provided for 95% of Gazprom’s gas production in 2012: Zapolyarnoye (112 bcm), Yamburgskoye (99 bcm), Urengoiskoye (77 bcm), Pestsovoye (25 bcm), South Russkoye
7 In 2013, the state controlled 50.01% of the company through Rosneftegaz, the Russian Federal Property Agency (Rosimuschestvo), and Rosgazifikatsiya. Another 25.86% of Gazprom’s shares are traded as depositary receipts.
Gazprom subsidiaries own 3.1% of the company’s shares.
8 Gazprom 2012 Annual Report.
(25 bcm), Yamsoveiskoye (20 bcm), Komsomolskoye (19 bcm), Yubileinoye (19 bcm), Orenburgskoye (16 bcm), Ety-Purovskoye (15 bcm), Medvezhye (12 bcm), and Astrakhanskoye (12 bcm). The majority of these fields came online during the Soviet era. In 2000–2012 Gazprom started production at Zapolyarnoye (Senomanian and Valanginian deposits), Bovanenkovo, Vyngayakhinsk, Ety-Purovskoye, Yen-Yakhninsk, and South Russkoye fields; Tab-Yakhninsk, Pestsovoye, Western Pestsovoye production areas; the second unit of the Achimov deposits of the Urengoiskoye field; the Aneryakhinsk and Kharvutinsk production areas of the Yamburgskoye field; the Nydinski unit of the Medvyezhye field; and the Yareisk production area of the Yamsoveiskoye field. The combined design output of these fields exceeds 350 bcm/year. Other fields are being prepared for production in the east of the country—Chayanda, Kovykta, Kirinskoe, South Kirinskoe, etc.
Novatek, the second largest gas producer in Russia (51 bcm in 2012) and the oldest non- Gazprom gas producer, has recently been pursuing an aggressive policy on the domestic market.
Mergers and acquisitions (with Severenergiya, Sibneftegaz, Nortgaz, and SIBUR), as well as the possibility of obtaining new licenses without competition (Geophizicheskoye, Salmanovskoye, North-Ob, and East-Tambey fields), allow the company to ensure a permanent expansion of its resource base and production (major promising projects include Nadym-Pur-Taz and Gydan Peninsula). The company controls 36 license areas, and nine are currently producing: the Yurkharovsk, Eastern Tarkosalinsk, Khanchevsk, Pureynoye, and Northern Urengoysk fields and the Olimpiysk, Yumantilsk, Beregovaya, and Samburgsk production areas, with a total annual output of more than 50 bcm. Specific features of Novatek’s business model include orientation on wet gas with a high content of condensate and a focus on gas processing. The company’s fields in the Nadym-Pur-Taz region are located close to the transportation and refining infrastructure, which minimizes the expense of development. Novatek is developing a major project, Yamal-LNG, on the basis of the South-Tambey field, located on the Yamal peninsula on the shore of the Gulf of Ob. The other fields on the Gydan peninsula and partly in the waters of the Gulf of Ob are in close proximity to the South-Tambey field and could provide a resource base for the project expansion. Together with Rosneft, Novatek has succeeded in obtaining an LNG export permit.
Novatek is expanding into the regional markets. After acquiring Chelyabinsk Mezhregiongaz, Novatek became the sole gas supplier for the Chelyabinsk region. Now Novatek is pursuing a similar policy in the Kostroma region. Novatek has been actively campaigning on the domestic market for long-term contracts with large industrial consumers (the largest being Mosenergo, Uralkali, Fortum, EON, InterRAO MMK, and Severstal—accounting for the combined amount of 36 bcm to be supplied over the next three years), to squeeze out Gazprom.
Rosneft started actively expanding its gas business in 2012 when Igor Sechin returned to the management, and was up to 41 bcm in 2012. Rosneft produces mostly associated petroleum gas, but plans to start gas production at the Vankorsky, Kharampursky, and Kunsko-Chaselsky fields, as well as at the Sakhalin-3 project and other assets it has consolidated. The company plans to produce as much as 100 bcm of gas by 20209 and to increase its share in the domestic market up to 20%. Through mergers and acquisitions (ITERA, with annual production of 13 bcm, and TNK-BP with 12 bcm), the company has drastically expanded its production base over the last two years and continues aggressively buying up smaller companies. With Igor Sechin simultaneously heading the board of directors of InterRAO UES, Rosneft managed to shove Novatek off by securing two major contracts with that company for supplying 36 bcm over the next 25 years. Furthermore, Rosneft “inherited” the TNK-BP’s contract with IES Holding.
Rosneft’s other major clients are Fortum and OGK-5. Rosneft is also aggressive on the regional markets, including in Bashkortostan, Perm, and Orenburg.
In the last year, Gazprom Neft, a Gazprom group member company, has assumed the strategy of asserting Gazprom’s interests on the gas market and helping Gazprom to maintain its share of the domestic market. Gazprom Neft’s major customer is Mosenergo, which is also a Gazprom group member company.
Lukoil is very cautious on the domestic gas market. It sells to Gazprom half of its gas output directly out of the wells and supplies the other half (6–7 bcm) to TGK-8 (a Lukoil group member company) under a swap agreement with Gazprom.
9 Presentation by V. V. Rusakova, “Natural gas is a promising growth resource for Rosneft.”
In total, there are 260 gas producing companies operating in Russia as of January 1, 2013, including nine vertically integrated oil companies, 14 companies affiliated with Gazprom, two affiliated with Novatek, and 128 independent companies and three companies operating within the framework of production sharing agreements. Yet only three companies represent the bulk of Russia’s production: Gazprom (73.1%), Novatek (12.6%), and Rosneft (5%).
Some foreign companies are active within joint ventures, though foreign participation in the upstream is limited by the existing regulation. The legal framework with respect to the use of subsoil resources in Russia is established by the Subsoil Law.10 This law places significant limitations on granting licenses for subsoil use with respect to areas of subsoil considered to be of “federal significance,” i.e., containing natural gas reserves of 50 bcm or more and those located in internal waters, territorial seas, or on the continental shelf of the Russian Federation.11 For these areas, a license may be granted only to a Russian legal entity. Upon holding an auction/tender for the right to use such an area of subsoil, the government may also place restrictions on the participation of Russian legal entities if they are owned by foreign investors in whole or in part. For areas of subsoil located entirely or partly on the continental shelf, a license may be granted only to a Russian legal entity with no less than five years’ experience in working on the continental shelf and in which the Russian Federation directly or indirectly holds more than 50% of shares. In practice, this means that these licenses are granted only to state-owned oil and gas companies (such as Gazprom and Rosneft) or, in some cases, to joint ventures with these companies (provided that the Russian Federation retains more than 50% of shares in the venture).12
Not only upstream investments but also all foreign capital investments in the gas sector (in exploration, production, transmission, wholesale supply, and export) are included on the list of business activities “which have strategic value for the defense of the state and national security support.”13 This regulation de facto requires the president’s personal permission for any deal
10 Federal Law “On Subsoil Resources” of February 21, 1992.
11 Deloitte, “Tax and Legal Guide to the Russian Oil and Gas Sector,” 2012.
12 Ibid.
13 Federal Law of 29 April 2008 N 57-FZ, “On the Procedure of Foreign Investments into Economic Organizations of Strategic Importance for the Defense of the State and National Security Support,” Russia Country Profile, 2008,
involving foreign partners. It effectively restricts international cooperation in this sphere to mega-projects with state-controlled companies.
Only companies with over 50% of state ownership and over five years of experience in marine exploration are allowed to apply for licenses on the continental shelf in Russia’s Artic regions.
No private companies are given access to these areas. As a result, 80% of licenses have already been allocated to Gazprom and Rosneft. Following the recognition that Russian companies would need foreign partners for the successful development of these challenging resources, a number of international oil companies (IOCs) entered into agreements establishing—in most cases—foreign registered joint ventures with Rosneft for the exploration of several licensing blocks located in the Kara, Barents and Okhotsk Seas, as well as the Black Sea. While the Russian company holds the license, these agreements generally involve a shareholder agreement of 33.33% for the foreign company, a commitment by the foreign company to finance exploration activities in line with license obligations and to develop joint technologies.14 Should gas or oil finds be made and the decision taken to move to a production phase, then the Russian partner would generally reimburse its share of exploration costs. The key challenge is now to ensure that an effective legislative and regulatory framework—especially within the Law on the Continental Shelf—is developed to define the role of an operator, to accommodate the fact that the license is strictly owned by a Russian company and that a foreign registered joint venture will be operator in projects, and that a robust framework is in place that protects the minority rights of foreign partners.
Production sharing agreements between the Russian Federation and investors (including foreign legal entities), though legally still allowed, are no longer supported by the government. Since 2000, no new PSAs have been signed in the oil and gas sector. There are only three active PSAs (Sakhalin-1, Sakhalin-2, and the Khariaginsky project), which were concluded before the current
14 IOCs teaming up with these two Russian state-controlled companies have to operate on a risk-service basis and cannot own any equity—the license and the reserves. Indeed, under the current schemes developed for exploration works in the Arctic shelf, they are minority shareholders in foreign registered joint ventures in which Russian state companies Rosneft and Gazprom are majority shareholders. Foreign companies have insisted on establishing foreign joint ventures in order to benefit from greater legal security and have created complex contractual frameworks to overcome gaps and uncertainties in the Russian legislation. As such, there is room to further clarify the Russian legislation and regulatory framework to facilitate these partnerships between foreign and Russian companies.
Federal Law “On PSAs” entered into force in 1996, and as such are “grandfathered in.”
Government officials have made several public announcements stating that the Russian Federation would not enter into new PSAs.15
Domestic Infrastructure Development
Russia has the world’s largest gas transportation network, called the Unified Gas Supply System (UGSS, see Figure 12), owned and operated by Gazprom, according to the law.
Figure 12. Unified Gas Supply System of Russia
Sources: Gazprom, Sberbank Investment Research
UGSS is a unique engineering complex encompassing gas production, processing, transmission, storage, and distribution facilities. It includes 168,000 km of gas trunklines and laterals, 222 line compressor stations, and 25 underground storages (UGS) facilities. The average gas transportation distance for the domestic market is 2785 km, and 3430 km for exports.16 The main part of the UGSS dates back to the Soviet era—42,600 km of total transmission lines are less than 20 years old, 98,000 are between 21 and 40 years old, and 27,000 km are over 40 years old.
Before the crisis, pipeline capacities were utilized at a very high rate, creating real deficit of capacities and problems with the pipeline access.
Over the past years, Gazprom was devoting a big share of its capital expenditures for the new gas pipeline construction to link up new production center on Yamal with the new export infrastructure, in particular 55-bcm Nord Stream, bringing gas directly to European consumers through the Baltic Sea and bypassing Ukraine. The most important Russian gas export pipelines are shown in Appendix 2: Major Russian Gas Export Pipelines Capacities.
Nord Stream, a 1,224-km gas pipeline, crosses the Baltic Sea and directly links the Russian and European gas transmission systems. In November 2011, the first string of the gas pipeline was brought on stream. In April 2012, the second string was laid ahead of schedule. Construction of the 55-bcm Nord Stream gas export pipeline (running from Russia to Germany’s Baltic Sea coast) is an example of Russia’s policy to build new routes for direct gas exports to Europe that bypass transit countries. The first 27.5-bcm string of the $11.4 billion pipeline was commissioned in November 2011. The second phase of the project was completed in 2012. The pipeline enjoys TEN status, which exempts it from restrictive provisions imposed by the EU’s Third Energy Package on gas exporters. The interconnectors are the NEL and OPAL.
Commissioned in 2011, the 36-bcm OPAL pipeline supplies mainly German and Czech customers, while the 440-km NEL pipeline is aimed westward to deliver Russian gas to storage facilities in Reden (Netherlands) and to the regional gas transportation network. There are also discussions on expanding the Nord Stream pipeline by adding a third and fourth line to the two existing lines and scaling up the compressor stations in order to bring an additional 55 bcm to northwestern Europe (reaching as far as the UK market).
16 Gas State Program.
The launch of the new Bovanenkovo-Ukhta gas transmission system17 in 2012 through which Yamal gas could be fed into the UGSS, the Ukhta-Torzhok pipeline (at full design capacity of 28.5 bcm), as well as the Pochinki-Gryazovets and Gryazovets-Vyborg trunk gas pipelines, and the expansion of the Urengoy gas transportation hub and the Tyumen region’s northern areas- Torzhok trunk pipeline had to a certain extent alleviated the shortage of gas transportation capacities from the Nadym-Pur-Taz region and Yamal.
After the Nord Stream commitment, the next priority of Gazprom and the state is South Stream pipeline construction (Figure 13). In order to ensure uninterrupted gas supplies into the South Stream, the Southern Corridor gas pipeline system (Figure 14) is in development on the Russian territory with the capacity of 63 bcm/year. It requires construction of 2,500 km of trunk pipelines and 10 compressor stations. The project should be completed by 2017.
Figure 13. South Stream Pipeline
Source: Sberbank Investment Research
17 A multi-line, 2,400-km system to transport gas from the Yamal peninsula’s Bovanenkovsk field with design production of 115 bcm per year (and in the long term, when Neocomian and Jurassic deposits are tapped, up to 140
South Stream, a 63-bcm pipeline project, is meant to improve Europe’s energy security by constructing a Ukrainian by-pass—a gas pipeline running under the Black Sea to Southern and Central Europe. It is supposed to link Russia’s Black Sea coast with Bulgaria through four spurs and a pipeline system of eight compressor stations in Russia, two in Bulgaria, and two in Serbia The total length of the Black Sea section will be some 900 km. In September 2011, the Shareholders Agreement of South Stream Transport AG was signed for South Stream’s offshore section. October 2011 saw the completion of the South Stream Consolidated Feasibility Study, combining a feasibility study for the offshore gas pipeline as well as national feasibility studies for gas pipeline sections running across the countries of Southern and Central Europe.
In December 2011, Gazprom obtained a permit for the construction of South Stream through the exclusive economic zone of Turkey. A detailed action plan was approved enabling them to proceed to the gas pipeline construction in late 2012. In April 2012, Gazprom’s international partners finally joined the South Stream Transport AG project company. In September 2013, the board of directors approved a detailed construction schedule, endorsed the company’s long-term budget, and confirmed the commissioning of South Stream’s first offshore line before the end of 2015.
Figure 14. Southern Corridor Domestic Pipeline System
Source: Gazprom
Another new pipeline to be built in the near future is the 4,000-km Power of Siberia mega- project, which will pump gas from Eastern Siberian fields (Kovykta and Chayanda) through Khabarovsk to China and to Vladivostok (Figure 15). Its projected total capacity is 61 bcm. The Yakutia-Khabarovsk-Vladivostok gas trunkline (some 3,200 km) will be constructed at the first stage by 2017, and later the Irkutsk center will be connected to the Yakutia center by the gas pipeline. The pipeline route will run in parallel with the Eastern Siberia-Pacific Ocean (ESPO) operational oil pipeline, thus streamlining the infrastructure and power supply costs. The pipeline
will pass, inter alia, through swampy, mountainous, and seismically hazardous areas. In October 2012, the Gazprom Management Committee adopted the final investment decision on pre- development of the Chayandinskoye field, construction of the Yakutia- Khabarovsk-Vladivostok gas trunkline, and gas processing facilities in Belogorsk.
Figure 15. Power of Siberia Pipeline
Source: Gazprom
Underground storage is an important part of the Russian gas infrastructure. These facilities ensure the security of supply in case of failure or accident, especially during the heating season when consumption often peaks on both the domestic market and the export markets, whereas the capacity to ramp up daily production and transport gas in several parts of the pipeline system is limited due to technical constraints and long transportation distances.
Tariffs for services on gas transportation through the trunk gas pipeline system provided by Gazprom for independent organizations are approved by the Russian Federation (RF) Federal Tariff Service, according to the “Guidelines for calculation of tariffs on services for gas transportation through trunk gas pipelines.”18 The guidelines allow for tariff differentiation (tariff rate) depending on the direction of gas delivery to the domestic market—therefore, they vary from pipeline to pipeline and are set for one year. The guidelines also determine the setting of a
18 Approved by the Russian Federation Federal Tariff Service (RF FTS). Order dated August 23, 2005, No. 388-э/1 (edition of the RF FTS Orders dated November 7, 2006, No. 245-э/2; October 25, 2007, No. 286-э/4; September 17, 2008, No. 174-э/6 and December 2, 2011, No. 315-э/10).
